A home warranty is different than homeowners’ insurance. Is a home warranty something you should buy? Your lender insists that you have to buy homeowners’ insurance but do you need a home warranty?
How does a Home Warranty Differ from Homeowners’ Insurance?
If you are financing the purchase of your new home, your lender will insist that you buy a homeowner’s insurance policy to cover any damage or destruction of your property. You need homeowners insurance to pay for repairs or stolen belongings. Many people believe that homeowners insurance will cover any necessary repairs, but it actually applies only in limited circumstances. A warranty can provide protection in other cases.
A warranty isn’t a replacement for homeowners insurance. Companies like HMS, Super and AHS cover service, repair, and replacement of home systems such as HVAC, electrical, and plumbing. It can also cover major appliances like your high end soaking tub, refrigerator and dishwasher. Warranties spell out what they include in the contract, and some are more robust than others.
“If a loss is covered by insurance, it cannot be covered by a home warranty, and if it’s an insurable loss, a warranty won’t cover it,” says Art Chartrand, executive director and counsel for the National Home Service Contract Association (NHSCA). “If a tree falls on your air conditioning unit – a sudden and fortuitous event due to a peril, wind – that is an insurance claim. If your air conditioner stops blowing cold air, you can use a home warranty.”
What Does Homeowners’ Insurance Cover
Homeowners insurance will pay for losses caused by a covered peril, such as a storm, fire, theft or vandalism, up to the policy’s limits. Depending on the coverage you choose, your policy may cover replacement cost, which is the amount of money required to purchase a new identical or substantially similar item, or actual cash value, which takes depreciation into account. In addition, you may have a deductible which will be the amount of money deducted from the total amount of money that your insurance company will pay to you. If you are getting a mortgage, you will need homeowners insurance regardless of whether you buy a single family home or a condo. (They are different levels of coverage.) For more information about condo insurance, click here.
More comprehensive home insurance plans, which are referred to as “all-risk,” extend beyond basic perils and have fewer exclusions.
“With a basic homeowners policy, if you spill a can of paint on your floor and damage it, the peril would not be covered,” says Debbie May, personal lines manager for The Fedeli Group, an Ohio-based insurance agency and risk management company. “With an all-risk policy, this would be a covered loss.”
Of course, whether an accident like a paint spill or water backup is covered depends on the coverages and exclusions in your homeowners insurance policy. But whether you choose a basic “named perils” policy or an all-risk policy that’s more thorough, if you own a home, you should invest in homeowners insurance. In fact, home insurance will very likely be required by your mortgage or home equity lender, which is another big difference between home insurance and home warranties.
I had one client who paid cash for a home in Potomac that was well over $1,000,000. He did not have home owners insurance because he did not think that the risk of loss was worth the annual premiums. Of course, if the house had been struck by lightening, the annual premiums would have seen like a reasonable cost to rebuild his home. Please get home owners insurance and make sure that it provides adequate coverage. Home owners insurance is definitely something that you can shop and compare rates. You may get a better rate if you bundle your home owners insurance with your car insurance. That is a good place to start if you are already happy with your car insurer’s service and coverage.
What Does a Home Warranty Cover
A home warranty is not insurance, but rather a contract that a homeowner signs with a home warranty company. It will pay to repair or replace a broken appliance that is not covered by a separate manufacturer’s warranty.
A home warranty may cover major systems, such as HVAC, electrical and plumbing, as well as major appliances, such as a refrigerator, stove, oven, washer and dryer. Many companies offer basic plans with limited coverage and allow homeowners to add optional coverage for an additional fee. A home warranty may only pay to repair or replace appliances or parts in certain circumstances, and a broken appliance will not necessarily be replaced with one that was made by the same manufacturer or that has the same features.
Home warranties often exclude coverage for appliances or systems that weren’t well maintained. If you bought a house and the previous owner didn’t take care of something, a home warranty might not cover repairs even if you performed all recommended maintenance after you purchased the house.
Who Makes the Repairs
Some warranties allow homeowners to choose a repair company, while others work with a network of service providers. When a homeowner files a claim, the home warranty company sends a local contractor to the home to inspect the problem, decide whether repairs are required and covered by the warranty and complete covered repairs.
What is the Cost of a Home Warranty
The cost of a warranty can depend on the type and size of the home, the location and the coverage chosen. Pools, multiple HVAC or high end refrigerators will require additional coverage. Some home warranty companies provide different levels of service, making it easier to craft the right coverage depending on how upscale your appliances are. If you have to use your warranty because something breaks, you must pay a service fee when a contractor comes to inspect a problem, whether the issue is covered by the warranty or not. If two different types of contractors, such as a plumber and an electrician, are needed to complete repairs, you may have to pay a fee for each.
Should You Buy a Home Warranty?
Even if you have homeowners insurance, there are a lot of things it won’t cover. A warranty can protect you from large and unexpected repair bills. Before choosing a home warranty, research several companies and find out what each of their plans cover and how much the premiums and service fees would be so you can make an informed decision. The basic cost of the home warranty may very well be something that the seller is willing to cover if you ask him or her for it during the contract negotiation period.
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